Institutional investors are considered as an organisation or company that invests money on behalf of other people. Examples of institutional investors are pensions, sovereign wealth funds, mutual funds, commercial banks, hedge funds, and insurance companies. For the benefit of its shareholders, members, customers or clients, these institutions are responsible for purchasing, trading and controlling a variety of financial instruments, including stocks, bonds and other investment vehicles. If a municipality can attract investors from institutional investments, it can then access even larger sums of capital. However, projects can be bundled for finances in order to achieve the threshold needed. They also present relatively high transaction costs when accessing funds. The available funds can be accessed using various ways. Municipalities have the ability to allocate funds and vehicles for investments, such as energy-efficiency funds, which combine finances from a variety of sources for the purpose of individual investments or publicly listed stock and debt. Additionally, investment banks have the ability to provide direct funding for projects using public-private partnerships, loans or other channels (Kaminker et al. 2013). Institutional investors tend to be more willing to take part in projects that include co-investments, public guarantees, risk-sharing mechanisms and other incentives from the government (IIGCC 2015). 

The interest in green projects is growing due to institutional investors becoming more aware of the risks associated with climate change; however, so far, the share of climate-friendly investment in the portfolios of EU institutional investors is only 1-2% (Kidney et al. 2015). 

Advantages: This method of involving institutional investors for financing makes it possible to access extremely large quantities of money and capital from investor groups that embrace a positive impact and are considering to make a long-term investment with moderate growth and minimal risks. This yardstick causes them to be very appealing for climate investments that also require longer timeframes to manifest impact.   

Disadvantages: The financial criteria and thresholds, as well as the complexity that comes with municipal investments are obstacles that hinder institutional investors from investing in municipal projects. Municipalities need to shape their projects to fit these criteria and scale to meet the interest of institutional investors. For example, there are still some barriers to larger-scale institutional investment in energy efficiency measures, particularly because the market is still immature and projects tend to be very heterogeneous. Transaction costs and the lack of standardization (the standardisation of contracts and requirements for monitoring, verification, reporting, project rating, energy performance contracting and certification) can make energy efficiency less attractive than other investment options, but bundling projects and implementing common processes could reduce these costs. Additionally, financial sector regulations may impose additional limitations on energy efficiency investments.